Story: We are impressed with the rapid development of its
various yards, specifically at Cosco Zhoushan. The group now
operates 12 docks, total group docking capacity has increased by
28% to hit 1.7mdwt, following the commencement of its VLCC dry
dock at Zhoushan.
Point: In addition to new sites, workshops, berths and docks
added over the year, the group is negotiating for additional sites
at Dalian, Zhoushan and a new offshore base near Nantong. This
implies upside to our order book assumptions, once its expansion
plans are firmed up. In addition, the group has available slots for
delivery of offshore projects in 2009, and we would expect more
offshore contracts to be awarded in 2H07.
Relevance: The stock is trading at P/E of 24.5x and 18.2x vs its 3
year eps cagr of 43.5%. Maintain Buy, based on SOP value of
S$6.10.
Beefing up engineering capability. To ensure smooth execution of the
offshore projects, the group has set up technical centres at each of the
major shipyards, headquartered in Dalian. The unit, headed by Mr Xu
XiuLong, who is the Vice General Manager, Technical Centre, joined the
group last year, after 11 years in ABS Singapore (a unit of American
Shipping Bureau). Cosco Shipyard Group now boasts of a team of 676
engineers spread over all its major yards, of which 16 engineers and 11
project managers are from Singapore (Keppel FELS, SembCorp Marine and
Labroy). Backed by a strong engineering team, we believe the group has
demonstrated its commitment to ensure smooth execution for on time
delivery of its offshore projects.
Appreciation of Rmb: As contracts for shipbuilding and offshore
projects are in US$ vs cost in Rmb, the appreciation of Rmb will be
negative for project margins. To mitigate the risks, the group has added
a protective clause in its contracts. In the event the Rmb appreciated by
2% over the fixed rate in its contract, Cosco will adjust its contract price,
allowing it to pass on the additional cost to its clients.
Steel price fluctuations : The impact on offshore projects is small, at <10%
of overall project cost, as the bulk of cost is in equipment. However, steel
cost is higher for shipbuilding projects, at about 20%. To mitigate this
risk, the group will tender for projects based on forecast steel price trends
over the next three years. Group procurement is enhanced due to bulk
requirements, strengthening the group’s bargaining power for discounts
as well as securing its sources of supplies. The group aims to secure
materials at the lowest price, while fixing the cost of steel over an
extended period of time. While steel price has risen in 1H07, the group
expects prices to stabilise or decline marginally from here, due to the
removal of 17% tax rebate to discourage steel exports.
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